Does the Ethereum Merge signal a greener future for crypto?

Amid the anticipatory buzz over the upcoming Ethereum Merge, there’s one thing that stands out as an upside for the environment: The drastic reduction in carbon footprint. With the shift to Proof-of-Stake ending the role of miners in the blockchain ecosystem, this would cut Ethereum’s energy use by 99.9%. As more countries around the world grapple with extreme weather events linked to climate change, this news is a welcomed development.

Most blockchains currently run on a Proof-of-Work or Proof-of-Stake system, which rely on participants or miners to create, validate and safeguard their record of transactions. Proof-of-Work blockchains such as Bitcoin and Ethereum require miners to solve puzzles, and be rewarded with tokens if their solution is validated by other miners. Proof-of-Stake, on the other hand, requires participants to stake a certain number of tokens before they are chosen to order blocks of transactions on the blockchain and get token rewards subsequently.

How Proof-of-Stake helps the environment

There is currently a vast difference in energy consumption required for Proof-of-Work and Proof-of-Stake blockchains. Bitcoin has an annual energy consumption of 130TWh which is equivalent to Ukraine’s. Ethereum clocks in considerably less at around 26TWh, but this is still on par with the annual energy consumption of a country such as Ecuador, which has a 17 million population.

In contrast, Tezos which is a Proof-of-Stake network uses only around 60MWh a year. This differs with Bitcoin and Ethereum by a factor of over two million, between six and seven orders of magnitude.

If the Merge proves to be a success, this could incentivise other blockchains to similarly shift to Proof-of-Stake. Beyond being good for our planet, this could open up the crypto market to new segments of investors who were previously deterred by environment concerns surrounding digital assets.

Growing interest in sustainable investing

A recent survey by digital investment advisor Betterment found that 90% of those invested in crypto said it was important that major cryptocurrencies become more environmentally friendly.  The survey, which polled 1,000 U.S. investors, found that investors favoring ESG assets skewed towards younger age groups, with Gen Z and millennial respondents accounting for 54%, versus 25% of Gen Xers and 42% of baby boomers. This not only gels with the youthful demographics of crypto investors, but also suggests ESG will become a more important criterion for investments in future.

The numbers for sustainable investing aren’t anything to scoff at either: U.S. sustainable funds drew nearly $70 billion last year, a 35% jump from 2020.

Crypto crowdfunding platform Earthfund sees what it calls a “big swing” in the crypto industry towards closer scrutiny of tokens and projects that meet ESG guidelines, driven by negative publicity  around Bitcoin’s carbon footprint. Its Co-Founder and Advisor Adam Boalt told Forbes: “We think that with the news that the Ethereum merge could reduce its energy consumption by 99.5%, that we’re likely to see a new wave of crypto investors who see beyond the Bitcoin-dominated headlines.”

A greener way to pay

In addition to making payments more efficient, crypto could well make them more environmentally sustainable too. An IMF study comparing energy use by digital currencies and existing payment systems found crypto’s energy consumption well below that of credit cards. This was driven by replacing proof-of-work with other consensus mechanisms, and by using permissioned systems.

With many central banks looking into launching their own digital currencies in the form of CBDCs, such projects will build on energy-efficient distributed-ledger systems which only permissioned institutions like commercial banks can join and validate without proof-of-work. That means CBDCs could potentially reduce the energy consumption of digital payments, and become even more energy-efficient than credit cards which are now the most widely used modes of payment.

While the Ethereum Merge has yet to take place, the attention it has drawn to the environmental spin-offs from this move cannot be easily dismissed. It goes a long way towards building awareness and starting important conversations around how crypto can better support sustainability, as more investors start zeroing in on ESG. For its potential impact on the future sustainability of crypto, how the Merge gets underway and the outcomes it delivers merit a closer watch.

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